Under the Internal Revenue Code, individuals acting as “whistleblowers” by reporting underpayment of taxes or violation of tax laws by another taxpayer may be awarded money from the amount collected by the government. To be eligible for a section 7623 award, the disputed amount must exceed two million dollars, and if the tax defrauder is an individual, the individual’s gross income has to exceed two hundred thousand dollars for any taxable year during which the alleged illegal act(s) took place. The Whistleblower Office may award up to 30% of the collected proceeds to the whistleblower based on how much the whistleblower contributed to the action against the alleged wrongdoer and the significance of the information reported. There is no limit to the dollar amount of the reward.
Those committing fraud against the government – and specifically the IRS – often get away with their actions, thus increasing the tax gap substantially. In the past, the government has used the “False Claims Act” as a major help in situations involving fraud against the government. It provides an incentive to citizens to report fraudulent actions by others. However, in the case of a taxpayer trying to defraud the IRS, section 7623 is of the greatest benefit to a whistleblower for the reasons discussed below.
2006 Amendments
In December of 2006, the number of potential awards to whistleblowers increased to 30%. The amendment also provided that when calculating that 30%, the IRS may take into account interest, penalties, and any other additions as well as back taxes owed. This was a huge change and provides whistleblowers with even more incentives than ever. Congress also provided for the creation of a Whistleblower Office to administer the program pursuant to section 7623.
How to File a Section 7623 Claim
A whistleblower starts out by filling out an “Application for Award for Original Information, IRS Form 211.” The form is essentially one page and asks for information about the alleged violation, how the whistleblower learned of it, and the amount owed by the taxpayer. Additional papers may be attached to explain the situation more fully, and the whistleblower must sign a declaration under penalty of perjury. The application and any supporting information should be mailed to the Whistleblower Office. Individuals may file a claim themselves, or they may hire an attorney to assist them in dealing with the IRS and obtain the appropriate award.
Rejection of a Section 7623 Claim
A whistleblower may have his or her claim go unprocessed or unpaid due to several reasons:
- The claim has no merit, lacks certain information, is submitted anonymously, under an alias or by a party other than a natural person.
- The claim does not identify a federal tax problem upon which the IRS took issue or didn’t result in any collection of proceeds.
- The whistleblower works for the Treasury Department or obtained the information while acting in his or her official capacity for the government or a member of a State body or commission with access to Federal tax documents.
- The whistleblower gained access to the information because of a contract with the Federal government.
If used correctly, the IRS Whistleblower Statute will not only benefit the whistleblower, but the taxpaying public as well. Incentivizing tax compliance will allow the government to collect more taxes owed, thereby closing the tax gap and appropriately meeting budgetary needs.
If you believe that you have been reported to the IRS:
Clearly, if you believe you have been reported to the IRS or any other taxing authority, you should consult with a qualified attorney immediately. We offer you over thirty years of tax defense practice experience. Criminal investigations are very serious and the penalties for being convicted of a tax crime can include significant felony prison time and other punishments and loss of other privileges. The United States Department of Justice recently reported an incarceration rate of over eighty percent of individuals convicted of tax crimes. In addition to prison sentences, if you are convicted of a tax crime, taxpayers may also be subject to substantial fines.
If you know, or suspect, that you are being, or may be, criminally investigated, it is a major mistake for you to ignore the Internal Revenue Service or speak to a Special Agent [i.e. an IRS criminal agent] without consulting with a qualified attorney experienced in tax.
Considering filing a Whistleblowing Claim?
Before you decide to join the IRS Whistleblower Reward Program you should carefully evaluate the risks of your own exposure to potential criminal liability. Under the IRS Whistleblower Program, the IRS might deny the tax whistleblower reward if the tax whistleblower was involved. It is important to evaluate your exposure to criminal liability before a decision is made to join the Tax Whistleblower Reward Program. Click here for a Washington Post article regarding a whistleblower who was prosecuted by the U.S. government and is currently serving 40 months in prison.
Further, if a tax whistleblower is a current or former employee who learned of the taxpayer’s financial and tax information while employed by the taxpayer, you should consider any civil liability you may be exposed to by filing a claim.
Finally, if you are governed by professional standards, i.e., if you are an attorney, accountant, or financial/investment advisor, you have additional considerations to consider in order to protect your professional license or duties.
We represent many individuals and businesses from many industries, including but not limited to, real estate management, construction, professional service firms, medical practices, manufacturing, retail, technology development, etc. We provide comprehensive tax litigation, planning, and defense representation. We invite you to contact our firm to discuss your legal questions. Please feel free to use our contact form or phone us at (415) 394-7200.